Private Pensions
Additional Changes Could Improve Employee Benefit Plan Financial Reporting Gao ID: GAO-10-54 November 5, 2009The Department of Labor (Labor) collects information on fees charged to 401(k) plans primarily through its Form 5500. Labor issued final regulations in November 2007, making changes to, among other things, Schedule C of the Form 5500. Labor put emphasis on reporting the indirect compensation paid to service providers and between service providers, in an effort to capture all of the costs that plan sponsors incur. Congress and others are concerned that Labor's rules could result in duplicative and confusing reporting. Given these concerns, Government Accountability Office (GAO) was asked to examine the new requirements and determine whether Labor's new requirements will provide (1) clear and understandable guidance to plan sponsors and (2) useful information to Labor and others. GAO analyzed Labor's regulations and interviewed Labor and other officials about disclosure and reporting practices.
Sponsors and service providers report confusion over Labor's new reporting requirements for the Form 5500 Schedule C and over how plan expenses are defined. Specifically, they have questions regarding the distinction between eligible and ineligible indirect compensation, that is, which types of indirect compensation must be reported on the Form 5500 (compensation that qualifies as "eligible" does not have to be reported). Labor's guidance on its Web site thus far has been limited, and, according to sponsors and service providers GAO spoke with, has raised additional questions that remain unanswered. Specifically, Labor has not provided sufficient guidance for sponsors and providers to accurately determine what elements of compensation qualify as eligible indirect compensation (fees or expense reimbursements charged to investment funds and reflected in the value of the investment). Therefore, interpretations have been left up to sponsors and providers and may result in a range of reporting practices, causing Labor to receive inconsistent and incomplete data. In addition to the new Form 5500 requirements, Labor has proposed another regulation on service provider fee disclosure (its 408(b)(2) regulation), but it has not yet been finalized. Sponsors and service providers GAO talked with stressed the importance of coordinating this initiative with the new Form 5500 requirements. Doing so may reduce the burden and the cost to service providers of making changes to their data gathering and reporting systems and clarify for plan sponsors the information they need to understand and compare the fees charged by various service providers. In GAO's discussions with Labor officials, they agreed that there was a need to coordinate the two regulations, and said that although they are working to finalize the proposed 408(b)(2) regulation, it is uncertain when it will be published. Labor officials told GAO that they do not have specific plans for using the data received as a result of the new Form 5500 requirements and will wait to see what information is reported before deciding what to do with the data. Although Labor's new requirements are meant to ensure that plan sponsors obtain the information they need to assess the compensation paid to service providers for services rendered to the plan, the Form 5500 may not provide useful information to Labor and others. Because plan sponsors are likely to report indirect compensation in varying formats, it is unclear how Labor will be able to compare such data across plans. In addition, GAO previously reported that the information provided to Labor on the Form 5500 has limited use for effectively overseeing fees paid by 401(k) plans because it does not explicitly list all of the fees paid from plan assets, yet these types of fees comprise the majority of fees in 401(k) plans. For example, plan sponsors are not required to explicitly report asset-based fees that are netted from an investment fund's performance, even though they receive this information for each of the mutual funds they offer in the 401(k) plan. Thus, despite the changes to the Form 5500, the new information provided may not be very useful to Labor, plan sponsors, and others.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-10-54, Private Pensions: Additional Changes Could Improve Employee Benefit Plan Financial Reporting
This is the accessible text file for GAO report number GAO-10-54
entitled 'Private Pensions: Additional Changes Could Improve Employee
Benefit Plan Financial Reporting' which was released on December 7,
2009.
This text file was formatted by the U.S. Government Accountability
Office (GAO) to be accessible to users with visual impairments, as part
of a longer term project to improve GAO products' accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the printed
version. The portable document format (PDF) file is an exact electronic
replica of the printed version. We welcome your feedback. Please E-mail
your comments regarding the contents or accessibility features of this
document to Webmaster@gao.gov.
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed
in its entirety without further permission from GAO. Because this work
may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this
material separately.
Report to the Chairman, Committee on Education and Labor, House of
Representatives:
United States Government Accountability Office:
GAO:
November 2009:
Private Pensions:
Additional Changes Could Improve Employee Benefit Plan Financial
Reporting:
GAO-10-54:
GAO Highlights:
Highlights of GAO-10-54, a report to the Chairman, Committee on
Education and Labor, House of Representatives.
Why GAO Did This Study:
The Department of Labor (Labor) collects information on fees charged to
401(k) plans primarily through its Form 5500. Labor issued final
regulations in November 2007, making changes to, among other things,
Schedule C of the Form 5500. Labor put emphasis on reporting the
indirect compensation paid to service providers and between service
providers, in an effort to capture all of the costs that plan sponsors
incur. Congress and others are concerned that Labor‘s rules could
result in duplicative and confusing reporting. Given these concerns,
GAO was asked to examine the new requirements and determine whether
Labor‘s new requirements will provide (1) clear and understandable
guidance to plan sponsors and (2) useful information to Labor and
others. GAO analyzed Labor‘s regulations and interviewed Labor and
other officials about disclosure and reporting practices.
What GAO Found:
Sponsors and service providers report confusion over Labor‘s new
reporting requirements for the Form 5500 Schedule C and over how plan
expenses are defined. Specifically, they have questions regarding the
distinction between eligible and ineligible indirect compensation, that
is, which types of indirect compensation must be reported on the Form
5500 (compensation that qualifies as ’eligible“ does not have to be
reported). Labor‘s guidance on its Web site thus far has been limited,
and, according to sponsors and service providers GAO spoke with, has
raised additional questions that remain unanswered. Specifically, Labor
has not provided sufficient guidance for sponsors and providers to
accurately determine what elements of compensation qualify as eligible
indirect compensation (fees or expense reimbursements charged to
investment funds and reflected in the value of the investment).
Therefore, interpretations have been left up to sponsors and providers
and may result in a range of reporting practices, causing Labor to
receive inconsistent and incomplete data. In addition to the new Form
5500 requirements, Labor has proposed another regulation on service
provider fee disclosure (its 408(b)(2) regulation), but it has not yet
been finalized. Sponsors and service providers GAO talked with stressed
the importance of coordinating this initiative with the new Form 5500
requirements. Doing so may reduce the burden and the cost to service
providers of making changes to their data gathering and reporting
systems and clarify for plan sponsors the information they need to
understand and compare the fees charged by various service providers.
In GAO‘s discussions with Labor officials, they agreed that there was a
need to coordinate the two regulations, and said that although they are
working to finalize the proposed 408(b)(2) regulation, it is uncertain
when it will be published.
Labor officials told GAO that they do not have specific plans for using
the data received as a result of the new Form 5500 requirements and
will wait to see what information is reported before deciding what to
do with the data. Although Labor‘s new requirements are meant to ensure
that plan sponsors obtain the information they need to assess the
compensation paid to service providers for services rendered to the
plan, the Form 5500 may not provide useful information to Labor and
others. Because plan sponsors are likely to report indirect
compensation in varying formats, it is unclear how Labor will be able
to compare such data across plans. In addition, GAO previously reported
that the information provided to Labor on the Form 5500 has limited use
for effectively overseeing fees paid by 401(k) plans because it does
not explicitly list all of the fees paid from plan assets, yet these
types of fees comprise the majority of fees in 401(k) plans. For
example, plan sponsors are not required to explicitly report asset-
based fees that are netted from an investment fund‘s performance, even
though they receive this information for each of the mutual funds they
offer in the 401(k) plan. Thus, despite the changes to the Form 5500,
the new information provided may not be very useful to Labor, plan
sponsors, and others.
What GAO Recommends:
GAO recommends that Labor (1) provide additional guidance and require
all indirect compensation be disclosed on the Schedule C, (2)
coordinate the implementation of its new Form 5500 requirements with
the publication of its 408(b)(2) regulation, and (3) require that asset-
based fees be explicitly reported. Labor generally agreed with GAO‘s
recommendations, although the agency proposes evaluating the data after
reporting begins to determine how best to address indirect
compensation.
View [hyperlink, http://www.gao.gov/products/GAO-10-54] or key
components. For more information, contact Barbara D. Bovbjerg at (202)
512-7215 or bovbjergb@gao.gov.
[End of section]
Contents:
Letter:
Background:
Labor's New Reporting Requirements Remain Unclear to Sponsors, but
Coordination with Other Regulatory Initiative May Help:
Labor Is Unclear about How It Will Use the New Information Reported on
the Form 5500, and the Form 5500 May Continue to Not Provide Useful Fee
Information to Labor and Others:
Conclusions:
Recommendations for Executive Action:
Agency Comments and Our Evaluation:
Appendix I: Comments from the Department of Labor:
Appendix II: GAO Contact and Staff Acknowledgments:
Related GAO Products:
Tables:
Table 1: Distinction between Direct and Indirect Compensation:
Table 2: Types of Reportable Indirect Compensation and Criteria for
Qualifying Indirect Compensation as "Eligible" for Exemption:
Figures:
Figure 1: Disclosure of Plan Fee Information from Service Providers to
Plan Sponsors, Which Then Report the Fees to the Federal Government:
Figure 2: Examples of the Layers of Compensation Paid to Entities for
Services to a Defined Contribution Plan:
Abbreviations:
DFE: direct filing entities:
EIC: eligible indirect compensation:
ERISA: Employee Retirement Income Security Act of 1974:
FAQ: frequently asked questions:
IRC: Internal Revenue Code:
IRS: Internal Revenue Service:
PBGC: Pension Benefit Guaranty Corporation:
SEC: Securities and Exchange Commission:
SPARK: Society of Professional Asset-Managers and Record Keepers:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
November 5, 2009:
The Honorable George Miller:
Chairman:
Committee on Education and Labor:
House of Representatives:
Dear Mr. Chairman:
The Department of Labor (Labor) uses its Form 5500 as a tool to monitor
and enforce plan sponsors' responsibilities under the Employee
Retirement Income Security Act of 1974 (ERISA).[Footnote 1] By filing
the Form 5500, plan sponsors satisfy the requirement to file annual
reports concerning, among other things, the financial condition and
operation of plans. In 2004, Labor's ERISA Advisory Council Working
Group reported that the Form 5500 Annual Return/Report (Form 5500), as
it was then structured, did not reflect the way that the defined
contribution plan fee structure works. At that time, only those fees
that were billed explicitly and were paid directly from plan assets
were deemed reportable.[Footnote 2] The Advisory Council concluded that
Form 5500s filed by defined contribution plans were of little use to
policy makers, government enforcement personnel, plan sponsors, and
participants in terms of understanding the cost of a plan, and
recommended that Labor modify it so that all fees incurred either
directly or indirectly by these plans would be reported. As a part of
three regulatory initiatives to improve disclosures provided to various
parties, Labor issued final regulations in November 2007, making
changes to facilitate a transition to an electronic filing system and
to update the annual reporting forms, effective for the 2009 plan year.
[Footnote 3] With these regulations, Labor made changes to the
reporting of service provider compensation on the Schedule C of the
Form 5500.[Footnote 4] Labor also has proposed regulations on two other
initiatives that are awaiting review and approval by the current
Secretary of Labor.[Footnote 5]
Congress and others are concerned that Labor's rules for reporting
compensation are more extensive than necessary and could result in
duplicative and confusing reporting. In addition, questions have been
raised by industry experts over whether the new changes impose
significant costs on service providers as they track and disclose the
additional information, and whether these costs will be passed on to
plan participants. Given these concerns, GAO was asked to examine the
new requirements in Labor's final regulations and form revision and to
answer the following questions:
1. Do Labor's new requirements provide clear and understandable
guidance to plan sponsors?
2. Will the new requirements provide useful information to Labor and
others?
To determine whether Labor's new requirements provide clear and
understandable guidance to plan sponsors, we interviewed nine plan
sponsors. We randomly selected three plan sponsors from the Form 5500
database, and selected six plan sponsors referred by industry
associations,[Footnote 6] plan service providers, well-known industry
experts, industry associations, researchers, and Labor. We also
reviewed related documents from Labor, such as its compliance
assistance and technical guidance information, and frequently asked
questions (FAQ) from its Web site that are meant to aid employers in
complying with the new regulations and forms revision. In addition, we
reviewed ERISA and relevant regulations governing 401(k) plans,
including Labor's proposed regulations, to understand current and
proposed annual reporting requirements. We interviewed and collected
documentation from those affected by the new Schedule C requirements,
to get their views on whether these new requirements will provide
useful information to Labor, plan sponsors, and others. We also
interviewed and collected documentation from a variety of stakeholders,
including plan sponsors, service providers, industry and consumer
associations, attorneys, and Labor. We obtained these stakeholders'
views on the new requirements and identified any challenges sponsors
might face. We also collected and analyzed information on the Form 5500
from other sources, such as the reports and testimonies from ERISA
Advisory Council Working Groups. Finally, we reviewed previous work
done by GAO to provide an update on Labor's efforts regarding the Form
5500 and its regulatory initiatives.[Footnote 7]
We conducted this performance audit from October 2008 through November
2009 in accordance with generally accepted government auditing
standards. Those standards require that we plan and perform the audit
to obtain sufficient, appropriate evidence to provide a reasonable
basis for our findings and conclusions based on our audit objectives.
We believe that the evidence obtained provides a reasonable basis for
our findings and conclusions based on our audit objectives.
Background:
ERISA:
ERISA, among other requirements, establishes the responsibilities of
employee benefit plan decision makers (fiduciaries) and the
requirements for disclosing and reporting plan fees. ERISA is designed
to protect the rights and interests of participants and beneficiaries
of employee benefit plans and to outline the responsibilities of the
employers and administrators who sponsor and manage these plans. Under
Titles I and IV of ERISA and the Internal Revenue Code (IRC), pension
and other employee benefit plan administrators are required to file
information annually on the financial condition and operations of the
plan. The requirements for completing the Form 5500 vary according to
the type of plan. If a company sponsors more than one plan, it must
file a Form 5500 for each plan. Additionally, ERISA and the IRC provide
for the assessment or imposition of penalties by Labor and the Internal
Revenue Service (IRS) for plan sponsors not submitting the required
information when due.
There are various types of Form 5500 filers. Filers are classified as
either single-employer plans, multi-employer plans, multiple-employer
plans, or direct filing entities (DFE). In general, a separate Form
5500 must be filed for each plan or DFE. Single-employer plans are
maintained by one employer or employee organization. Multi-employer
plans are established pursuant to collectively bargained pension
agreements negotiated between labor unions representing employees and
two or more employers and are generally jointly administered by
trustees from both labor and management. Multiple-employer plans are
maintained by more than one employer and are typically established
without collective bargaining agreements. DFEs are trusts, accounts,
and other investment or insurance arrangements in which plans
participate and that are required to or allowed to file the Form 5500.
Form 5500 Annual Return/Report:
The Form 5500 was intended, in part, to measure employers' compliance
with ERISA's fiduciary and funding provisions, among other
requirements.[Footnote 8] It provides information about the financial
condition of the plan, annual amounts contributed by participants, and
the plan's investment income. The form also provides information on
plan characteristics, such as plan type (defined benefit or defined
contribution),[Footnote 9] method of funding, and numbers of employees
and participants as well as the number of employees who are excluded
from the plan for various reasons.
The Form 5500 is the principal source of information about employer-
sponsored pension and welfare benefit plans that is available to Labor,
IRS, and the Pension Benefit Guaranty Corporation (PBGC), and is the
reporting vehicle for about 730,000 such plans. Accordingly, the Form
5500 constitutes an integral part of each agency's enforcement,
research, and policy formulation programs. It is also a source of
information and data for use by other federal agencies, Congress, and
the private sector in assessing employee benefit, tax, and economic
trends and policies. The form also serves as a primary means by which
plan operations can be monitored by participants, beneficiaries, and
the general public.
Labor, IRS, and PBGC jointly developed the Form 5500 so that employee
benefit plans could satisfy (1) the provisions of the IRC that apply to
tax-qualified pension plans and (2) the annual reporting requirements
under ERISA. Labor enforces ERISA's reporting and disclosure provisions
and fiduciary responsibility standards, which, among other things,
concern the type and extent of information provided to the federal
government and plan participants and ensure that employee benefit plans
are operated solely in the interests of plan participants. IRS enforces
standards that relate to such matters as how employees become eligible
to participate in benefit plans; how they become eligible to earn
rights to benefits; and how much, at a minimum, employers must
contribute. PBGC insures the benefits of participants in defined
benefit private pension plans.
Labor's Regulatory Initiatives:
Labor's regulatory initiatives to expand disclosure requirements cover
the following three distinct areas: (1) disclosures by plan sponsors to
assist participants in making informed investment decisions;[Footnote
10] (2) disclosures by service providers to assist plan fiduciaries in
assessing the reasonableness of provider compensation and potential
conflicts of interest;[Footnote 11] and (3) more efficient, expanded
fee and compensation disclosures to the government and the public
through a substantially revised, electronically filed Form 5500 Annual
Return/Report.[Footnote 12]
Labor implemented the third initiative on expanding fee and
compensation disclosures on the Form 5500--issuing regulations revising
the Form 5500 in November 2007--in an effort to facilitate the
transition to an electronic filing system; reduce and streamline annual
reporting burdens; and update the annual reporting forms to reflect
current issues, agency priorities, and new requirements under the
Pension Protection Act of 2006.[Footnote 13] According to officials at
Labor, these changes were made to increase transparency regarding the
fees and expenses paid by employee benefit plans. Labor also wanted to
ensure that plan officials obtain the information they need to assess
the compensation paid for services rendered to the plan, taking into
consideration revenue-sharing arrangements among plan service providers
and potential conflicts of interest.
Fee/Compensation Reporting on the Form 5500:
For the 2009 plan year Form 5500, the new Schedule C requires plan
sponsors to classify the fees they pay service providers as either
"direct" or "indirect" compensation. As shown in table 1, fees are
separated into those paid directly by the plan to a service provider
and those received by a service provider indirectly from another
service provider.
Table 1: Distinction between Direct and Indirect Compensation:
Direct compensation:
* Compensation received by a plan service provider directly from plan
assets;
* Does not include anything the employer pays from corporate assets,
since employer-paid fees do not reduce plan assets.
Indirect compensation:
* Any payment received by a plan service provider from sources other
than directly from the plan or plan sponsor, if received in connection
with services provided to the plan (either monetary or nonmonetary) or
in connection with the service provider's position with the plan, such
as meals, entertainment, or free travel.
Source: Department of Labor, Annual Reporting and Disclosure Revision
of Annual Information Return/Reports; Final Rule and Notice, 72 Fed.
Reg. 64709 (2007) codified at 29 C.F.R. § 2520.103-1.
[End of table]
Plan sponsors must also determine whether any indirect compensation is
reportable (i.e., "ineligible" or "eligible" for exemption from Labor's
reporting requirements, as shown in table 2). Most indirect
compensation starts out as having to be reported on the Schedule C.
Table 2: Types of Reportable Indirect Compensation and Criteria for
Qualifying Indirect Compensation as "Eligible" for Exemption:
Eligible indirect compensation (EIC);
Definition: EIC includes fees or expense reimbursements charged to
investment funds and reflected in the value of the investment or in the
return on investment (e.g., finders' fees, "soft dollar" revenue, float
revenue, and/or brokerage commissions);
Reported on Schedule C: If a fee falls into this category, no amount
needs to be reported because these fees are eligible for exemption. An
alternative reporting method can be used, which allows sponsors to
report only that there was EIC paid and the entity that provided the
required written disclosures.[A].
Ineligible indirect compensation;
Definition:
* Reportable gifts, meals, and entertainment;
* Fees paid to a recordkeeper by an investment provider on a per
participant or per plan account basis;
Reported on Schedule C: Yes, along with the specific amount, because it
is ineligible for exemption. The service provider receiving the
compensation does not have to provide an actual amount. It may simply
provide a formula through which the compensation is determined.
Source: Department of Labor, Department of the Treasury, Pension
Benefit Guaranty Corporation, Revision of Annual Information Return/
Reports, 72 Fed. Reg. 64731 (2007).
Note: Amounts charged against the fund for ordinary operating expenses,
such as attorneys' fees, accountants' fees, and printers' fees, are not
reportable indirect compensation for Schedule C purposes.
[A] Written disclosures for a bundled arrangement must separately
disclose and describe each component of indirect compensation that
would be required to be separately reported if the provider were not
relying on this alternative reporting option.
[End of table]
However, indirect compensation can readily become "eligible" indirect
compensation (EIC). For indirect compensation to be EIC, and thus not
reported on the Schedule C, the plan sponsor must receive written
materials from the service provider that describe and disclose the
following information:
1. the existence of indirect compensation,
2. services provided for this compensation,
3. formulas used to calculate the value of this compensation,
4. who received the compensation, and:
5. who paid the compensation.
When indirect compensation does qualify as "eligible," sponsors have
the option of using an alternative reporting format that, according to
Labor, is simpler than the format that must be used to report
ineligible indirect compensation. With the alternative reporting
format, plan sponsors only have to disclose the name, address, and
employer identification number of these service providers.[Footnote 14]
Whether a plan sponsor receives the required written disclosures is the
key to whether indirect compensation is reportable on the Schedule C.
According to Labor, reporting indirect compensation as EIC is an option
that the sponsor may choose instead of reporting under the rules
applicable to other indirect compensation. Indirect compensation does
not qualify as EIC if a service provider does not provide the required
disclosures to the plan sponsor. In this case, the plan sponsor is
required to report the available information from the service provider
on the Schedule C, such as the identity of the service provider and
nature of the services provided. The plan sponsor is also required to
list the service provider for failing to or refusing to provide
necessary information. However, if the plan sponsor does receive
information from the service provider upon request, the plan sponsor
has the option of reporting the indirect compensation as EIC (i.e.,
reporting only that indirect compensation was paid and who provided the
disclosure).
Many of the fees and expenses associated with mutual fund investments
are not explicitly reported on the Form 5500. According to a 2004
report by Labor's ERISA Advisory Council Working Group on Plan Fees and
Reporting on Form 5500, many 401(k)[Footnote 15] and 403(b)[Footnote
16] plans have moved toward using mutual funds as an investment option.
With mutual funds, the plan service provider takes the investment
management fees[Footnote 17] and expenses of managing the mutual fund
directly from the mutual fund earnings, and these fees are not
explicitly reported to plan sponsors. Without data on mutual funds, the
largest component of most 401(k) retirement plans, Labor is unable to
fully assess the impact of service provider fees on investment returns.
In our November 2006 report, we recommended that Congress consider a
statutory change with explicit disclosure requirements for service
providers.[Footnote 18] Without such a change, we concluded, Labor will
continue to lack comprehensive information on all fees being charged
directly or indirectly to 401(k) plans. Figure 1 illustrates the
disclosure of plan fee information from service providers to plan
sponsors, which then report the fees to the federal government. The
figure also shows that some fees are reported to the Securities and
Exchange Commission (SEC), not to Labor.
Figure 1: Disclosure of Plan Fee Information from Service Providers to
Plan Sponsors, Which Then Report the Fees to the Federal Government:
[Refer to PDF for image: illustration]
Retirement plan sponsors are required to report the fees charged by
service providers to Labor, except those already reported to SEC, which
collects data on fees charged by mutual funds.
Record-keeping: to Retirement Plan Sponsor;
Customer Service: to Retirement Plan Sponsor;
Retirement Plan Sponsor: to Department of Labor.
Investment Management: to Securities and Exchange Commission.
Source: GAO analysis of Department of Labor regulations.
[End of figure]
Additionally, many plan fiduciaries enter into bundled arrangements
[Footnote 19] with other plan service providers for recordkeeping or
other administrative services that typically do not entail explicit
charges to the plan. In a "bundled arrangement" plan, service providers
such as recordkeepers and trustees are often compensated for their
services to the plan (1) through either subtransfer agent fees,
[Footnote 20] 12b-1 fees,[Footnote 21] or other administrative fees
[Footnote 22] or (2) through what are called "revenue-sharing
arrangements."[Footnote 23] As a result, fees and expenses are not paid
from plan assets, but rather from the expenses of one of the plan's
investments (e.g., a mutual fund's operating expense, which is shared
with the plan's service provider).
Labor's New Reporting Requirements Remain Unclear to Sponsors, but
Coordination with Other Regulatory Initiative May Help:
Sponsors Report That Labor's New Requirements Remain Unclear:
Even though Labor has provided guidance on their recent changes to the
Form 5500 Schedule C, plan sponsors and service providers reported that
they were unclear about Labor's new reporting requirements.
Specifically, plan sponsors and experts told us that they have
questions regarding the distinction between eligible and ineligible
indirect compensation, and several said that they were unclear about
what types of compensation qualified as EIC. A recent survey of service
providers also reports confusion regarding compliance. An industry
association representing service providers surveyed its membership,
asking if sponsors and service providers understand Labor's new
Schedule C requirements enough to effectively comply[Footnote 24].
Although only a small number of members (19) responded to the survey,
74 percent of the respondents (14) reported that Labor has not provided
sufficient guidance for providers to accurately determine what elements
of compensation qualify as EIC.
Plan sponsors and experts were also concerned about how much
compensation should be disclosed. Figure 2 illustrates the potential
difficulty. For example, a plan pays a recordkeeper direct compensation
to administer the plan, which includes sending new participants a
welcome packet about the plan. Part of the compensation that the
recordkeeper receives goes toward paying a fulfillment vendor to make
the welcome packets and send them to participants.[Footnote 25] The
fulfillment vendor, in turn, pays a printer to print and collate the
packets. As a result, there are multiple layers of payments involved,
and sponsors and experts were unsure of how much of the indirect
compensation they should be required to disclose. They were also
concerned that the compensation would be reported multiple times on the
Schedule C. For example, amounts paid by the recordkeeper to vendors
would already be included in the overall amount paid by the plan
sponsor to the recordkeeper.
Figure 2: Examples of the Layers of Compensation Paid to Entities for
Services to a Defined Contribution Plan:
[Refer to PDF for image: illustration]
First example:
401(k) Defined Contribution Plan:
Administers plan by contracting with a:
Mutual Fund Company: Can offer everything from a single investment
product for inclusion in an employer-sponsored retirement plan to ’turn-
key“ options that include management of the various investments
included in a comprehensive plan.
Who buy services from a:
Financial Advisor: Independent company gives investment advice to
participants; and/or:
Transfer Agent: Processes transactions, such as exchanges between
funds, investments, and withdrawals.
Second example:
401(k) Defined Contribution Plan:
Administers plan by contracting with a:
Recordkeeper: Service provider who administers the plan;
Who buy services from a:
Fulfillment Vendor: Provides a variety of services for a plan,
including data entry; call centers; and order processing, such as
mailing participant statements and welcome kits;
Who buy services from a:
Locator Service: Third-party vendor specializes in finding ’lost“
participants; and/or:
Commercial Printer: Vendor prints welcome packets and envelopes.
Source: GAO analysis of examples provided by the Groom Law Group.
[End of figure]
Concerns have also been raised about how to report noncash
compensation.[Footnote 26] Sponsors and service providers said that
they were uncertain about the new Schedule C requirement to report
noncash compensation, which is also a type of indirect compensation.
Sixty-three percent (12 of 19) of members who responded to the industry
survey reported insufficient guidance on this issue. For example, one
plan sponsor explained that he was not sure how he would handle, or
whether he would even report, the noncash compensation benefit (food,
entertainment, and making contacts) of attending a marketing event
designed to facilitate future sales of ERISA plans. Respondents
(service providers) in the industry survey were asked to imagine that
their organization sponsored a similar event for customers and
potential customers. Respondents were evenly split on how they would
communicate the value of the benefit to attendees for purposes of
Schedule C reporting. Some respondents believed the event would not be
reportable, while others said they would provide its full value to all
attendees and leave it to them to decide whether the event is
reportable.
Uncertainty Regarding the Reporting of Indirect Compensation May Result
in Incomplete Data Being Reported to Labor:
Because service providers may have difficulty determining what elements
of compensation qualify as EIC, different interpretations and reporting
practices may ensue and could result in inconsistent and incomplete
data being reported to Labor. For example, some sponsors may interpret
certain compensation as reportable, while others may not, leaving Labor
with incomplete information from some plans. In addition, since amounts
categorized as EIC will not be reported, Labor will have no way of
using these data to determine whether the amounts being paid by plans
are reasonable and will be unable to compare these types of
compensation across plans. According to Labor, not having to report
amounts categorized as EIC is intended to simplify the annual reporting
process and reduce the burden for plans and service providers for the
types of indirect compensation that commenters said would be difficult
and potentially expensive to allocate to individual plans.
Industry experts and plan sponsors with whom we spoke said additional
guidance on reporting indirect compensation may make it easier for plan
sponsors to comply. Labor has posted a set of FAQs on its Web site
regarding the changes that are specific to Schedule C reporting.
However, industry officials with whom we spoke said that although these
FAQs answered many questions, additional questions have stemmed from
reading the FAQs that have not yet been addressed. Labor officials told
us that they were reviewing and prioritizing the additional questions
they have received to develop further guidance.
As filing deadlines for the 2009 plan year draw closer, sponsors and
service providers have told us that they still have questions about the
new Schedule C requirements, and may need more time to comply. Labor
has already noted on its Web site that there is flexibility regarding
reporting for the 2009 plan year, stating that as long as sponsors
receive a statement from their service providers that, despite a good-
faith effort, they were unable to provide the newly required
information to them, sponsors will not be required to report those
service providers on the Schedule C.
Coordination with Other Regulatory Initiative Could Alleviate
Compliance Burden:
According to industry experts and plan sponsors with whom we spoke, the
coordination of one of Labor's other initiatives on fee disclosure with
the current Form 5500 requirements could make it easier for plan
sponsors to comply. Specifically, sponsors and service providers
stressed the importance of Labor coordinating the new Form 5500
requirements, which govern reporting at the end of a plan year, with
the finalization of its proposed rule on "up-front" service provider
disclosure to plan sponsors. Labor has requirements that govern the
entering of a service agreement between a sponsor and service provider,
referred to as the 408(b)(2) requirements, and has proposed changes to
them that have not yet been finalized.[Footnote 27] Consequently, the
new Schedule C requirements, or "after-the-fact" disclosures," were
finalized before the 408(b)(2) regulation, which governs "up-front"
disclosures. Since plan sponsors report on the Schedule C an after-the-
fact summary of the fees and expenses paid by their plans during the
plan year, the information provided on this form is directly related to
information about fees and expenses that service providers will be
required to disclose to plan sponsors by the 408(b)(2) requirements "up
front," at the beginning of a service relationship. In our discussions
with Labor officials, they noted that the better scenario would have
been publishing the finalized 408(b)(2) regulation before the new Form
5500 requirements and acknowledged the importance of coordinating the
finalization of the proposed regulation with the Form 5500
requirements. The officials told us that the move to require electronic
filing for the 2009 plan year led them to finalize the Schedule C
requirements first. However, it is unclear when the 408(b)(2)
regulation will be finalized, which is important given that the first
Form 5500s will be filed under the new requirements in July 2010.
If the Schedule C requirements are not coordinated with the
finalization of the proposed rule to change up-front disclosure, there
could be competing sets of disclosure requirements for sponsors and
service providers. Service providers had anticipated that the 408(b)(2)
regulations would have already been finalized to coordinate with the
changes to the Form 5500 to ensure they comply with both sets of rules
at once. Without the coordination, service providers are in the
position of potentially having to make expensive investments to update
their data systems two separate times. In addition, coordinating the
408(b)(2) requirements with the Form 5500 requirements could help
ensure that plan sponsors are meeting their fiduciary responsibilities
when selecting or renewing a contract with a service provider.
Labor Is Unclear about How It Will Use the New Information Reported on
the Form 5500, and the Form 5500 May Continue to Not Provide Useful Fee
Information to Labor and Others:
Labor officials told us that they do not have specific plans for using
the data received as a result of the new requirements, and we found
that even with the changes, the Form 5500 may not be useful to Labor,
sponsors, or others. Labor officials told us that they will wait to see
how the newly required information is reported before determining its
use. In addition, because plan sponsors will be required to list any
service provider who fails to or refuses to provide the necessary
information on the Schedule C, Labor could potentially pursue listed
service providers for enforcement action. However, it is unclear
whether Labor has any plans to devote additional resources to follow up
on service providers. In fact, for the 2009 plan year, plan sponsors
will not be required to list service providers who fail to provide
information if the service provider provides a statement that they made
a good-faith effort to make any necessary recordkeeping and information
system changes in a timely fashion.
It is also unclear whether Labor has a plan to follow up with plan
sponsors to ensure that they have received the newly required
disclosures. Labor officials told us that the new requirements are
meant to reinforce a fiduciary's obligation of monitoring service
providers and plan fees and also are intended as an "exercise in
discipline" for the sponsor, since the sponsor will have to create a
financial record to submit it to Labor. According to these officials,
this will ensure that sponsors receive the information they need about
indirect compensation paid to service providers.
Labor's efforts are also meant to effect a behavioral change in plan
sponsors and service providers. According to Labor officials, the
intent is for plan sponsors to understand and then obtain the
information they need to determine the reasonableness of the fees they
are paying. Since service providers often prepare the Form 5500 on
behalf of plan sponsors, the regulatory changes are also designed to
notify service providers that compensation information should be
provided to sponsors. Still, Labor and others are concerned that some
service providers, who may not feel bound by Labor's reporting
requirements, may neglect to list the indirect compensation they may
have received.
Finally, the Form 5500 continues to have limited use for Labor,
sponsors, and participants.
Labor. Despite Labor's efforts with the new Form 5500 requirements,
information on asset-based fees is still not explicitly required to be
reported on the form. As we have previously reported, the form does not
explicitly list all of the fees paid from plan assets.[Footnote 28] For
example, plan sponsors were not required to report mutual fund
investment fees to Labor, even though they received this information
for each of the mutual funds they offered in the 401(k) plan in the
form of a prospectus.[Footnote 29] While prospectuses are provided to
SEC, on a fund-by-fund basis, neither SEC nor Labor have readily
available information to be able to link individual fund information to
the various 401(k) plans to which the funds may be offered as
investment options.[Footnote 30] Furthermore, prospectuses provide fees
as expense ratios, which are used as an intermediate step in
calculating net rates of return, and, as such, the dollar amount of
deductions from plan assets are not explicitly stated.
Labor officials told us that asset-based fees are now required to be
reported on the Schedule C. However, even with the changes made to the
reporting of indirect compensation, plan sponsors may wind up only
reporting the presence of such fees on the Schedule C along with the
identity of the service provider. Because these fees are already
reported to SEC, the service provider must either (1) provide the plan
sponsor with a document that discloses the documents already sent to
SEC, with references to the pages or sections of the documents that
contain the required information, or (2) determine whether the amount
of the fund's investment management fee that is allocable to the
specific 401(k) plan is enough to be reportable, and then provide the
dollar amount or a description of the formula used to calculate the
amount of the compensation to the plan sponsor. The plan sponsor can
then treat the asset-based fee or compensation as EIC and only report
the identity of the service provider. Without information on all of the
fees charged directly or indirectly to 401(k) plans, Labor is limited
in its ability to identify fees that may be questionable.
Labor officials told us that the changes to the Form 5500 were not
meant to result in a comprehensive database of plan fees, because Labor
did not want to put an undue burden on plan sponsors to comply with the
new Form 5500 requirements. Labor asserts the expansion of the Schedule
C is already significant. In addition, Labor officials told us that
because the Schedule C is only filled out by larger plans with more
than 100 participants, the schedule is not a complete picture of the
universe of plan fees.
Sponsors. The Form 5500 may also not be the best vehicle for sponsors
to assess service provider fee reasonableness or to understand business
arrangements between service providers, since the form is filed long
after the plan sponsor has already engaged the provider and selected
the investment options. For the most part, the form is filled out for
plan sponsors by service providers, who know the compensation
arrangements and how to calculate the fees charged. According to
industry experts, determining the dollar amounts to attach to
ineligible indirect compensation is a source of confusion, because
although some indirect compensation is straightforward, the calculation
of other compensation is left to the best judgment of the service
provider. Also, service providers may also choose to disclose only the
formulas they use to determine ineligible indirect compensation, making
it difficult for sponsors to assess fees or understand business
arrangements.
Participants. Participant groups told us that plan sponsors who use the
Form 5500 to inform participants are likely to overwhelm participants
with the volume and detail required as a result of Labor's new
regulations. Both Labor and industry experts told us that the Schedule
C is not designed to be used by participants because it does not
provide them with an easy comparison of available investment options.
Conclusions:
Labor has recently made some effort to improve the Form 5500,
specifically the Schedule C. However, the changes made seem unlikely to
resolve the issues surrounding service provider disclosure to plan
sponsors. Absent detailed guidance aimed at clarifying the indirect
compensation reporting requirements, Labor is at risk of receiving
inconsistent and incomparable information on the Schedule C. In
addition, the new requirements currently give plan sponsors the option
of not disclosing EIC on the Schedule C. If Labor allows certain
indirect compensation to be deemed EIC, and therefore not to be
reported, Labor will continue to have incomplete information on
compensation received by service providers, and will be no better
informed.
Similarly, as long as asset-based fees netted from an investment fund's
performance are not required to be reported on the Form 5500, sponsors,
participants, and Labor will not know the true costs of a plan.
Requiring plan sponsors or administrators to report more complete
information to Labor on fees--that is, those paid out of plan assets or
by participants--puts the agency in a better position to effectively
oversee defined contribution plans.
Despite Labor's intentions in changing the Form 5500 Schedule C, the
way the regulations are currently written may not result in an increase
in the amount of meaningful service provider compensation information
reported to Labor. In addition, it is unclear whether plan sponsors
will actually receive the information on service provider compensation
that Labor believes is important for them to have. Because of the
option to distinguish indirect compensation as either eligible or
ineligible, service providers may choose to qualify their compensation
as EIC and not provide their disclosures to plan sponsors.
Meanwhile, Labor has also proposed regulatory changes that could
eliminate some of the confusion surrounding 408(b)(2) disclosure
requirements. However, it is unclear whether the final regulations will
be coordinated with the existing changes to the Form 5500 reporting
requirements. Coordinating these initiatives may reduce the burden and
the cost to service providers and clarify for plan sponsors the
information they need for the service provider selection and renewal
processes.
Finally, as we suggested in our November 2006 report, absent a
statutory change with explicit requirements for service providers,
Labor will continue to lack comprehensive information on all fees being
charged directly or indirectly to 401(k) plans.
Recommendations for Executive Action:
To minimize the possibility that inconsistent and incomparable
information will be reported on the Schedule C and to ensure that the
data collected results in meaningful information for Labor, sponsors,
and participants, we recommend that the Secretary of Labor take the
following action:
* Provide additional guidance regarding the reporting of indirect
compensation and require that all indirect compensation be disclosed on
the Schedule C.
Furthermore, consistent with our previous recommendation, to ensure
comparable disclosure among all types of service providers and ensure
that all investment products' fees are fairly disclosed, we recommend
that the Secretary of Labor take the following action:
* Require asset-based fees that are netted from an investment fund's
performance (and, as such, are not paid with plan assets) be explicitly
reported on the Form 5500.
To reduce the potential for additional costs and burden being placed on
service providers, we recommend that the Secretary of Labor take the
following action:
* Coordinate the implementation of the Form 5500 revisions with the
publication of its final 408(b)(2) regulations, since the two
initiatives are closely related.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Department of Labor (Labor).
We received written comments from the Assistant Secretary for Employee
Benefits Security Administration, which we reproduced in appendix I.
Labor generally agreed with our recommendations. Labor also provided
technical comments, which we have incorporated in this report where
appropriate.
Labor stated that it is committed to making the shift to the expanded
Schedule C reporting requirements as smooth as possible, and that it
has already engaged in substantial outreach on the new reporting
requirements. Specifically, regarding our recommendation that Labor
provide additional guidance on the reporting of indirect compensation,
Labor stated that it has plans to continue its outreach efforts,
including publishing additional Schedule C guidance. Regarding our
recommendation that all indirect compensation be disclosed on the
Schedule C and that asset-based fees be explicitly reported on the Form
5500, Labor explained that it had originally proposed that all indirect
compensation charged against a plan's investments be required to be
reported on the Schedule C, without providing an alternative reporting
option. However, Labor provided an alternative reporting option for
eligible indirect compensation to plan fiduciaries on the basis of
comments received on the proposed rule. Labor stated that the
alternative reporting option would provide the department with enough
information to engage in effective oversight activities. Labor also
stated that once Schedule C reporting begins (for most plans, July 2010
and later), it will be able to evaluate the data it receives, taking
into consideration our recommendation. Although Labor stated in its
comments that its eligible indirect compensation reporting requirements
are intended to help ensure fiduciaries are collecting information and
evaluating service provider indirect compensation, we believe that it
is also important for the indirect compensation information to be
reported to Labor. As we stated in our report, we continue to believe
that Labor will not receive enough information to engage in effective
oversight activities. Finally, Labor stated that it agreed with our
recommendation to coordinate the implementation of the Form 5500
regulations with the publication of its final 408(b)(2) regulation, and
that it will continue to coordinate the two initiatives.
As agreed with your office, unless you publicly announce its contents
earlier, we plan no further distribution until 30 days after the date
of this report. At that time, we will send copies of this report to the
appropriate congressional committees, the Secretary of Labor, and other
interested parties. In addition, the report will be available at no
charge on GAO's Web site at [hyperlink, http://www.gao.gov].
If you or your staff has any questions concerning this report, please
contact me at (202) 512-7215 or bovbjergb@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. GAO staff who made key contributions
to this report are listed in appendix II.
Sincerely yours,
Signed by:
Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
[End of section]
Appendix I: Comments from the Department of Labor:
U.S. Department of Labor:
Assistant Secretary for Employee Benefits Security Administration:
Washington, D.C. 20210:
October 19, 2009:
Ms. Barbara D. Bovbjerg:
Director, Education, Workforce, and Income Security Issues:
United States Government Accountability Office:
Washington, DC 20548:
Dear Ms. Bovbjerg:
Thank you for the opportunity to review the Government Accountability
Office's (GAO) draft report entitled "Private Pensions: Additional
Changes Could Improve Employee Benefit Plan Financial Reporting" (GAO-
10-54). Your recommendations focus on new requirements for reporting
information on service provider fees and other compensation on the
Schedule C (Service Provider Information) of the Form 5500 Annual
Return/Report of Employee Benefit Plan, generally effective for plan
years beginning on or after January 1, 2009.
The Department of Labor (Department) is responsible for administering
and enforcing the fiduciary, reporting, and disclosure provisions of
Title I of the Employee Retirement Income Security Act of 1974 (ERISA).
ERISA requires plan fiduciaries, when selecting or monitoring service
providers, to act prudently and solely in the interest of the plan's
participants and beneficiaries. Having information sufficient to enable
the plan fiduciary to make informed decisions about the services and
the reasonableness of the costs for those services is critical because
excessive fees can undermine the retirement security of plan
participants. Similarly, understanding how expenses affect participant
accounts is of critical importance to plan participants and
beneficiaries in choosing among investment alternatives.
The increasing use of charges against investment funds, revenue sharing
among service providers, and other "indirect compensation" arrangements
has presented challenges for many plan officials trying to understand
and monitor service providers' compensation. In recognition of those
challenges, the Department undertook separate, but related regulatory
initiatives intended to help plan sponsors and participants. As noted
in the GAO draft report, in addition to expanding indirect compensation
reporting on Schedule C, the Department is engaged in rulemaking to
amend the ERISA section 408(b)(2) regulation to require service
providers to make up front fee and compensation disclosures to plan
fiduciaries. The Department also published a proposed rule to improve
the disclosure of fee information to pension plan participants by,
among other things, requiring information on investment fees charged to
individual accounts to be furnished to participants and beneficiaries
in individual account plans.
Your draft report recommends that (1) the Department provide additional
guidance regarding the reporting of indirect compensation and require
that all indirect compensation be disclosed on the Schedule C; (2)
coordinate the implementation of its new Form 5500 requirements with
the publication of its 408(b)(2) regulation; and (3) require that asset-
based fees that are netted from an investment fund's performance be
explicitly reported on the Form 5500.
With respect to your first recommendation, the draft report noted that
members of the regulated community have noted the possible confusion
that might exist in technical applications of reporting on the new
Schedule C revenue sharing and other indirect compensation received by
service providers from sources other than directly from the plan or
plan sponsor. The Department is committed to making the shift to these
expanded Schedule C reporting requirements as smooth as possible. The
Department has already engaged in substantial outreach on both the new
EFAST2 system and the new reporting requirements. In addition to
publishing Frequently Asked Questions on the 2009 Schedule C, the
Department has participated in many public programs and seminars and is
also offering a series of free webcasts on the new reporting
requirements. The Department intends to continue its outreach efforts,
including publishing additional Schedule C guidance on its website and
updating existing educational materials.
As to your second recommendation that the Department coordinate the
implementation of the Form 5500 revisions with the publication of its
408(b)(2) regulation, as GAO recognized, the Schedule C revisions are
an integral part of the Department's multi-faceted initiative to
improve the quality and comprehensibility of service provider fee and
compensation information. We agree with GAO's recommendation and will
continue to coordinate the initiatives.
Finally, the draft report recommended that, in order to ensure
comparable disclosure among all types of service providers and ensure
that all investment products' fees are fairly disclosed, the Department
should modify the alternative reporting option for "eligible indirect
compensation" and require asset-based fees that are netted from an
investment fund's performance (and not paid directly by the plan) be
explicitly reported on the Form 5500. GAO expressed concern that the
alternative reporting option would preclude the Department from
obtaining comprehensive data on indirect compensation received by
service providers in connection with services provided to employee
benefit plans.
As originally proposed, all indirect compensation charged against the
plan's investments was required to be reported on the Schedule C,
without providing an alternative reporting option.
Comments from the regulated community objected to the requirement. They
expressed concerns that the nature and complexity of the business and
investment environment in which plans operate, including omnibus
account structures, would make it extremely burdensome, costly, and
potentially misleading to attempt to allocate indirect compensation at
the per plan or per participant level. Commenters also observed some of
the fee information relevant to the plan administrator in connection
with evaluating investments, such as asset-based charges in mutual
funds, is already required to be disclosed to the Securities and
Exchange Commission.
Although the Form 5500 generally serves as a source of data for use by
the government and private sector in assessing employee benefit, tax,
economic trends, and policies, the revisions to the Schedule C were not
designed with an eye toward creating a government data-base for
evaluating and comparing indirect compensation arrangements in the
pension plan market place. The Schedule C "eligible indirect
compensation" reporting requirements were intended to help ensure
fiduciaries were collecting information and evaluating service provider
indirect compensation. Specifically, in attempting to strike a balance
between the costs and benefits of improved disclosure of investment-
related fees and expenses, the Department concluded that some of the
concerns regarding the burden and complexity of allocating fees charged
in an omnibus account structure could be addressed by establishing a
separate reporting rule that relied on disclosures regarding those fees
resulting from other regulations or business practices if those
disclosures met the objectives underlying the Department's Schedule C
proposal. The final Schedule C revisions thus included an alternative
reporting option for "eligible indirect compensation." In the case of
asset-based charges against plan investments, the alternative reporting
option requires that the plan identify on the Schedule C the person
from which the administrator receives certain required disclosures
regarding that compensation.
The Department has previously expressed its opinion that in hiring and
retaining service providers plan fiduciaries must engage in an
objective process designed to elicit information necessary to assess
the qualifications of the provider, the quality of services offered,
and the reasonableness of the fees charged in light of the services
provided. In addition, the process should be designed to avoid self-
dealing, conflicts of interest, or other improper influence. The
"alternative reporting option" for eligible indirect compensation was
intended to emphasize and reinforce the obligation of a plan fiduciary
to review plan expenses as part of the on-going obligation to monitor
service provider arrangements. The Department also concluded that it
would provide the Department with enough information to engage in
effective oversight activities while addressing concerns about annual
reporting burdens and costs, which are increasingly being passed on to
plan participants and beneficiaries. Plans choosing the alternative
reporting option would also bear the burden of maintaining records
sufficient to demonstrate compliance with the conditions of the
alternative reporting option.
In reaching those conclusions, the Department was mindful of the fact,
noted in the GAO draft report, that the Schedule C is filed by only
large funded plans and that only service providers that receive $5000
or more in compensation are covered. Thus, the fee information on
Schedule C is by definition an incomplete data field. We also were
sensitive to the Schedule C changes being part of a broader Form 5500
update, i.e., the changes to implement a mandatory electronic filing
requirement for a new form processing system (EFAST2), new pension plan
reporting requirements mandated by the Pension Protection Act (PPA),
and a new Short Form 5500 to satisfy a separate PPA mandate to develop
a new even more simplified report for small plans.
Nonetheless, we appreciate GAO's interest in enhancing service provider
fee reporting to optimize the data available to Department and other
enforcement agencies and research entities. We continually review the
Form 5500 to see whether changes are needed. Once Schedule C reporting
begins (for most plans July 2010 and later), we will be able to
evaluate the data we receive, taking into account GAO's recommendation.
Also, although we want to avoid using the Schedule C to accomplish fee
disclosure objectives better dealt with in our 408(b)(2) fiduciary
disclosure regulation or our participant level fee disclosure
regulation, we will continue to explore ways to enhance reporting fee
information in conjunction with those related projects.
Sincerely,
Signed by:
Phyllis C. Borzi:
Assistant Secretary:
[End of section]
Appendix II: GAO Contact and Staff Acknowledgments:
GAO Contact:
Barbara Bovbjerg, (202) 512-7215 or bovbjergb@gao.gov:
Staff Acknowledgments:
The following team members made key contributions to this report:
Tamara Cross, Assistant Director; Monika Gomez, Analyst-in-Charge;
Christopher Langford; James Bennett; Jessica Orr; Walter Vance; and
Roger Thomas.
[End of section]
Related GAO Products:
Private Pensions: Conflicts of Interest Can Affect Defined Benefit and
Defined Contribution Plans. GAO-09-503T. Washington, D.C.: March 24,
2009.
Private Pensions: Fulfilling Fiduciary Obligations Can Present
Challenges for 401(k) Plan Sponsors. GAO-08-774. Washington, D.C.: July
16, 2008.
Private Pensions: GAO Survey of 401(k) Plan Sponsor Practices (GAO-08-
870SP, July 2008), an E-supplement to GAO-08-774. GAO-08-870SP.
Washington, D.C.: July 16, 2008.
Private Pensions: Information That Sponsors and Participants Need to
Understand 401(k) Plan Fees. GAO-08-222T. Washington, D.C.: October 30,
2007.
Private Pensions: 401(k) Plan Participants and Sponsors Need Better
Information on Fees. GAO-08-95T. Washington, D.C.: October 24, 2007.
Defined Benefit Pensions: Conflicts of Interest Involving High Risk or
Terminated Plans Pose Enforcement Challenges. GAO-07-703. Washington,
D.C.: June 28, 2007.
Private Pensions: Increased Reliance on 401(k) Plans Calls for Better
Information on Fees. GAO-07-530T. Washington, D.C.: March 6, 2007.
Private Pensions: Changes Needed to Provide 401(k) Plan Participants
and the Department of Labor Better Information on Fees. GAO-07-21.
Washington, D.C.: November 16, 2006.
Private Pensions: Government Actions Could Improve the Timeliness and
Content of Form 5500 Pension Information. GAO-05-491. Washington, D.C.:
June 3, 2005.
[End of section]
Footnotes:
[1] Under Title I of ERISA, the "administrator" or "plan administrator"
is the plan official responsible for meeting certain reporting and
disclosure obligations. However, for the purposes of this report, we
use the term "plan sponsor" to encompass the responsibilities of the
plan administrator and plan sponsor (i.e., the employer who sets up the
plan).
[2] The Form 5500 includes information on a plan's sponsor and the
number of participants, among other things. The form also provides more
specific information, such as plan assets, liabilities, insurance, and
financial transactions.
[3] A "plan year" is a 12-month period designated by a retirement plan
for calculating vesting and distribution, among other things. The plan
year can be the calendar year or an alternative period (e.g., July 1 to
June 30). Filers have a normal deadline of 210 days after the end of
the plan year to submit their Form 5500; therefore, a calendar year
filer would have to file by July 31 of the next year.
[4] Service providers are hired by plan sponsors to provide
administrative services to the plan. Some plans hire a service
provider, such as a mutual fund company, a bank, or an insurance
company, that is able to provide an entire range of administrative
services to a plan. Other plans receive asset management and
recordkeeping services from a service provider, while providing other
services with in-house staff.
[5] On January 20, 2009, the Obama Administration issued a White House
memorandum that ordered all proposed and final regulations that had not
been published in the Federal Register to be withdrawn for review and
approval.
[6] The information and opinions we gathered from talking with plan
sponsors is not representative of or generalizeable to the universe of
plan sponsors.
[7] GAO, Private Pensions: Government Actions Could Improve the
Timeliness and Content of Form 5500 Pension Information, [hyperlink,
http://www.gao.gov/products/GAO-05-491] (Washington, D.C.: June 3,
2005).
[8] The Form 5500 includes information on the plan's sponsor and the
number of participants, among other things. The form also provides more
specific information, such as plan assets, liabilities, insurance, and
financial transactions. Filing this form satisfies the requirement for
the plan administrator to file annual reports concerning, among other
things, the financial condition and operation of plans. Labor uses the
Form 5500 as a tool to monitor and enforce plan sponsors'
responsibilities under ERISA.
[9] Traditional defined benefit plans generally provide a fixed level
of monthly retirement income that is based on salary, years of service,
and age at retirement, regardless of how the plans' investments
perform. In contrast, benefits from defined contribution plans are
based on the contributions to and the performance of the investments in
individual accounts, which may fluctuate in value.
[10] See 73 Fed. Reg. 43013, proposed rules of July 23, 2008, on
"Fiduciary Requirements for Disclosure in Participant-Directed
Individual Account Plans."
[11] See 72 Fed. Reg. 70987, proposed rules of December 13, 2007, on
"Reasonable Contract or Arrangement Under Section 408(b)(2) - Fee
Disclosure."
[12] See 72 Fed. Reg. 64709, final rules of November 16, 2007, on
"Annual Reporting and Disclosure."
[13] The regulations also postponed the effective date of the
electronic filing requirement under 29 C.F.R. § 2520.104a-2 to apply to
plan years beginning on or after January 1, 2009. The form revisions
are to be fully implemented as part of the switch under the ERISA
Filing Acceptance System (also known as EFAST) to a wholly electronic
filing system for the 2009 reporting year.
[14] The alternative reporting option does not apply to all indirect
compensation; it only applies to the indirect compensation that is
eligible for that treatment. It has to be a particular type of
compensation, with the most common example being compensation that
reduces the value of the investment--for example, 12b-1 fees (fees
related to marketing) that are paid to broker/dealers to sell the fund.
The alternative reporting method is generally only available for
service providers receiving indirect compensation exclusively. If a
service provider receives both direct and indirect compensation, the
alternative reporting option is not available and more in-depth
information must be disclosed on the Schedule C.
[15] "401(k) plans" are private pension plans that allow workers to
save for retirement by diverting a portion of their pretax income into
an investment account that can grow tax-free until withdrawn in
retirement.
[16] "403(b) plans" are similar to 401(k) plans but are offered only to
employees of hospitals, educational institutions, and certain nonprofit
organizations.
[17] Companies that manage mutual funds or other investment products
charge investment fees for all services related to operating the fund.
Such practices are not limited to the mutual fund industry, but rather
apply to any pooled investment vehicle where fees are intrinsic to the
underlying investment and not explicitly billed or paid by the plan.
[18] GAO, Private Pensions: Changes Needed to Provide 401(k) Plan
Participants and the Department of Labor Better Information on Fees,
[hyperlink, http://www.gao.gov/products/GAO-07-21] (Washington, D.C.:
Nov. 16, 2006).
[19] A "bundled arrangement" is when a plan sponsor hires one service
provider to provide a full range of services directly or through
subcontracts to provide services to its employees' retirement plan.
[20] Subtransfer agent fees are paid by mutual funds to 401(k)
providers who perform the recordkeeping function for 401(k) plans. They
are charged against the mutual funds and thereby reduce the
participants' investment returns and, ultimately, their benefits. The
payments are intended to support transfer agent and shareholder
servicing activities by the recordkeeper. These activities include, for
example, keeping track of share ownership at the plan and participant
account level, and conveying information about the mutual fund to the
plan and participants.
[21] Fees related to marketing and compensating brokers to sell the
fund are known as 12b-1 fees.
[22] Administrative fees are charged to administer the plan as a whole,
and these fees can include trustee, audit, legal, investment
consulting, and communication fees.
[23] "Revenue sharing" is a mutual fund distribution practice. These
payments are paid from a plan's investments to other providers without
going through the plan. A feature of these payments is that, while they
are not paid from a plan's assets, the payments are "shared" by the
plan's service providers, often without the knowledge of the plan
sponsors, fiduciaries, and participants.
[24] The Society of Professional Asset-Managers and Record Keepers
(SPARK) is a professional association servicing mutual fund companies,
banks, insurance companies, investment advisors, third-party
administration, recordkeepers, and benefit consulting firms in the
retirement plan industry, including most major service providers. SPARK
conducted a survey of its members in early 2009 regarding their
opinions on the new reporting requirements for the Form 5500 Schedule
C. The survey was completed by 19 of SPARK's 57 institutional members,
all but 1 of which provide Form 5500 preparation services. The
responding firms, however, collectively serve approximately 174,000
plans with nearly 34 million participants.
[25] A fulfillment vendor can provide a number of services for a plan,
including customer service; call center; data entry; and order
processing, such as mailing participant statements and welcome kits.
[26] Noncash compensation can be gifts, meals, or entertainment for the
purpose of facilitating the sales or promotion of an ERISA-related
plan.
[27] On December 13, 2007, Labor published a proposed rule (72 Fed.
Reg. 70987) to amend its current regulation under section 408(b)(2) of
ERISA to clarify the information fiduciaries must receive and service
providers must disclose for purposes of determining whether a contract
or arrangement is "reasonable," as required by ERISA's statutory
exemption for service arrangements. The regulation would require
service providers to disclose, in writing, to plan fiduciaries of
401(k) plans, all services to be furnished; all direct and indirect
compensation to be received; and any potential conflict of interest,
such as certain third-party relationships, that could affect their
objectivity under a service contract or arrangement.
[28] [hyperlink, http://www.gao.gov/products/GAO-07-21].
[29] One 401(k) ratings and analytics firm believes that it is critical
to separate out all the components of the expense ratio into the
appropriate categories: for example, management fee, 12b-1, subtransfer
agent, and shareholder servicing. The firm has devised a methodology to
calculate a plan's total costs that company officials believe will
enable a plan sponsor to estimate these costs and determine the impact
on participant retirement outcomes. According to company officials, the
end result will be a fully broken out list of all the fees in a 401(k)
plan that allows comparison across plans and across different fee
structures (bundled and unbundled).
[30] Mutual fund prospectuses are filed with SEC and are available to
the public from SEC's Electronic Data Gathering, Analysis, and
Retrieval System. The filings are not exclusive to those mutual funds
offered as part of a 401(k) plan, but are an aggregate filing of fees
associated with the funds, making it difficult for plan sponsors to
determine their allocable share. Plan sponsors are not required to
include prospectus fee disclosures with their Form 5500 filings.
Furthermore, it is not an agency practice for SEC to provide prospectus
information to Labor, nor would such a practice benefit Labor, unless
the information was then consolidated with the corresponding Form 5500
filings for plans that offered the mutual fund.
[End of section]
GAO's Mission:
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting
its constitutional responsibilities and to help improve the performance
and accountability of the federal government for the American people.
GAO examines the use of public funds; evaluates federal programs and
policies; and provides analyses, recommendations, and other assistance
to help Congress make informed oversight, policy, and funding
decisions. GAO's commitment to good government is reflected in its core
values of accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through GAO's Web site [hyperlink, http://www.gao.gov]. Each
weekday, GAO posts newly released reports, testimony, and
correspondence on its Web site. To have GAO e-mail you a list of newly
posted products every afternoon, go to [hyperlink, http://www.gao.gov]
and select "E-mail Updates."
Order by Phone:
The price of each GAO publication reflects GAO‘s actual cost of
production and distribution and depends on the number of pages in the
publication and whether the publication is printed in color or black and
white. Pricing and ordering information is posted on GAO‘s Web site,
[hyperlink, http://www.gao.gov/ordering.htm].
Place orders by calling (202) 512-6000, toll free (866) 801-7077, or
TDD (202) 512-2537.
Orders may be paid for using American Express, Discover Card,
MasterCard, Visa, check, or money order. Call for additional
information.
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: [hyperlink, http://www.gao.gov/fraudnet/fraudnet.htm]:
E-mail: fraudnet@gao.gov:
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Ralph Dawn, Managing Director, dawnr@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Chuck Young, Managing Director, youngc1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
